Quantum Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Mar. 31, 2020

Pre-tax loss reflected in the consolidated statements of operations for the years ended March 31, 2020, 2019 and 2018 is as follows (in thousands):



	Year Ended March 31,
	2020				2019			2018
U.S.	$	(6,318	)		$	(40,935	)	$	(46,923	)
Foreign	1,911			514	514			464
Total	$	(4,407	)		$	(40,421	)	$	(46,459	)

Income tax provision (benefit) consists of the following (in thousands):



	Year Ended March 31,
	2020			2019			2018
Current tax expense
Federal	$	(115	)	$	(217	)	$	(3,484	)
State	106			31			26
Foreign	1,271			1,103			206
Total current tax expense	1,262			917			(3,252		)
Deferred tax expense
State	33			32			32
Foreign	(492		)	1,427			107
Total deferred tax expense	(459		)	1,459			139
Income tax provision (benefit)	$	803		$	2,376		$	(3,113	)

The income tax provision differs from the amount computed by applying the federal statutory rate of 21% for 2020 and 2019, and 31.5% for 2018 to income (loss) before income taxes as follows (in thousands):



	For the year ended March 31,
	2020			2019			2018
Expense (benefit) at the federal statutory rate	$	(925	)	$	(8,488	)	$	(14,634	)
Equity compensation	280			905			1,024
Permanent items	914			359			564
Foreign taxes	1,612			(2,133		)	1,336
State income taxes	(20		)	(997		)	(830		)
Valuation allowance	(2,639		)	10,913			(42,784		)
Uncertain tax positions	(8,654		)	(9,278		)	(336		)
Tax reform	—			(207		)	52,682
Credit monetization	—			—			(323		)
Expiration of attributes	11,679			12,268			410
Research and development credits	(1,566		)	(879		)	(1,714		)
Other	122			(87		)	1,492
Income tax provision	$	803		$	2,376		$	(3,113	)

Significant components of deferred tax assets and liabilities are as follows (in thousands):



	As of March 31,
	2020			2019
Deferred tax assets
Inventory valuation method	$	924		$	882
Accrued warranty expense	650			814
Distribution reserves	187			2,137
Loss carryforwards	85,638			93,308
Tax credits	17,416			20,346
Restructuring charge accruals	—			678
Deferred revenue	17,043			13,094
Acquired intangibles	2,660			2,822
Lease obligations	3,413			—
Other accruals and reserves not currently deductible for tax purposes	16,152			7,051
Gross deferred tax assets	144,083			141,132
Valuation allowance	(137,814		)	(140,359		)
Total deferred tax assets, net of valuation allowance	$	6,269		$	773
Deferred tax liabilities
Depreciation	$	(1,440	)	$	(450	)
Lease assets	(3,413		)	—
Other	(967		)	(524		)
Total deferred tax liabilities	$	(5,820	)	$	(974	)
Net deferred tax assets (liabilities)	$	449		$	(201	)

The valuation allowance decreased by $2,545 during the year ended March 31, 2020, increased by $10,311 during the year ended March 31, 2019, and decreased by $24,248 during the year ended March 31, 2018.

A reconciliation of the gross unrecognized tax benefits follows (in thousands):



	For the year ended March 31,
	2020			2019			2018
Beginning Balance	$	116,032		$	150,559		$	170,730
Increase in balances related to tax positions in current period	2,275			1,718			3,298
Increase in balances related to tax positions in prior period	144			—			25
Decrease in balances related to tax positions in prior period	(4		)	(25,095		)	(20,692		)
Decrease in balances due to lapse in statute of limitations	(11,165		)	(11,150		)	(810		)
Settlement and effective settlements with tax authorities and related remeasurements	—			—			(1,992		)
Ending balance	$	107,282		$	116,032		$	150,559

During fiscal 2020, excluding interest and penalties, there was a $8.8 million change in the Company's unrecognized tax benefits. Including interest and penalties, the total unrecognized tax benefit at March 31, 2020 was $108.4 million, of which $90.1 million, if recognized, would favorably affect the effective tax rate. At March 31, 2020, accrued interest and penalties totaled $1.1 million. The Company's practice is to recognize interest and penalties related to income tax matters in the income tax provision in the consolidated statements of operations. As of March 31, 2020, $102.3 million of unrecognized tax benefits were recorded as a contra deferred tax asset in other long-term assets in the consolidated balance sheets and $6.1 million (including interest and penalties) were included in other long-term liabilities in the consolidated balance sheets.

The Company files its tax returns as prescribed by the laws of the jurisdictions in which we operate. Our U.S. tax returns have been audited for years through 2002 by the Internal Revenue Service. In other major jurisdictions, the Company is generally open to examination for the most recent three to five fiscal years. During the next 12 months, it is reasonably possible that approximately $9.1 million of tax benefits, inclusive of interest and penalties, that are currently unrecognized could be recognized as a result of the expiration of applicable statutes of limitations.

As of March 31, 2020, the Company had federal net operating loss and tax credit carryforwards of approximately $334.2 million and $67.6 million, respectively. The net operating loss and tax credit carryforwards expire in varying amounts beginning in fiscal year 2022 if not previously utilized, and $13.3 million are indefinite-lived net operating loss carryforwards. These carryforwards include $11.1 million of acquired net operating losses and $8.4 million of acquired credits, the utilization of which is subject to various limitations due to prior changes in ownership.

Certain changes in stock ownership could result in a limitation on the amount of both acquired and self-generated net operating loss and tax credit carryovers that can be utilized each year. If the Company has previously undergone, or should it experience in the future, such a change in stock ownership, it could severely limit the usage of these carryover tax attributes against future income, resulting in additional tax charges.

Due to its history of net losses and the difficulty in predicting future results, Quantum believes that it cannot rely on projections of future taxable income to realize the deferred tax assets. Accordingly, it has established a full valuation allowance against its U.S. and certain foreign net deferred tax assets. Significant management judgement is required in determining the Company's deferred tax assets and liabilities and valuation allowances for purposes of assessing its ability to realize any future benefit from its net deferred tax assets. The Company intends to maintain this valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. The Company's income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, its valuation allowance.